Maples market re-emerges

It’s a situation fixed-income investors and underwriters have faced before: how to ensure that more non-financial issuers come to the market.

A similar situation confronted the two groups a few years ago with rate reset preferred shares, which for a period of time were the financing instrument of choice for financial institutions because of their favourable capital treatment. Retail investors, the main buyers, wanted a broader, more diversified and higher-yielding portfolio so they had less exposure to the financial sector. So underwriters and issuers responded.

Institutional investors are faced with a similar situation: How do they broaden their portfolio now that the so-called Maples market has reemerged -though not to the same extent of the glory days of a few years back. Maples are debt issues by foreign corporations that are denominated in Canadian dollars, done in the domestic Canadian market using Canadian documentation.

Over the period, 2006-2007, or before the global financial crisis hit, the market was dominated by financial institutions including some of the biggest global issuers and names. European banks, U.S. investment dealers and Australian banks all came to the local market for a deal that they hoped would give them a yield that was very similar to LIBOR.

Over the past year, issues have come in dribs and drabs: two foreign banks, National Australia Bank ($100-million) and Lloyds TSB Bank PLC ($500-million) have raised capital this month. Earlier this year Rabobank Nederland ($100-million) and ANZ Banking Group ($100-million) financed in Canada.

But the investor clamor remains: Bring us non-financial issuers. It’s worth nothing a non-deal road show was held last week for Korea Gas Corp. The idea -with Merrill Lynch, Scotia Capital and HSBC leading the charge -was to familiarize potential investors with the company known as Kogas, which was formed in 1983, and is now the world’s largest LNG importer with operations in Canada. In March 2010, it entered into a farmout agreement with Encana Corp. whereby it is required to invest about $565-million over the next three years, to earn a 50% interest in two North American gas resource plays.

Before Kogas’s road show, issues by foreign non-financial institutions have been rare. Last September, Molson Coors Brewing Co., which despite being well known in Canada is a U.S. company, raised $500-million of seven-year money at $3.95%. Last December Anheuser-Busch InBev Worldwide Inc. raised $600-million via a six-year 3.65% Maple transaction. Those two issuers, both led by TD Securities, were rated BBB.

But the reality is that Canada isn’t top of the list for many foreign issuers. Potential issuers have to be made aware of the Canadian market and then convinced of the merits of raising capital here. A road show is one way to get the process going.

Some foreign issuers have also raised capital via medium-term notes which have, at times, stopped them from going the Maple route. But a select few have set up programs and also used the Maple process. Another reality is that the world has discovered A-rated foreign non-financial issuers and has priced them accordingly. “Across the world, non-financial investment grade issuers are well bid. If they came to Canada they would trade through provincials, meaning that the yield would be lower than for the provincial issuers,” said one underwriter. “It would be an impossible sell for us.”